Prices vs. quantities , linking , cap-and-trade , carbon tax , uncertainty , EU Emissions Trading Scheme
Abstract:
This paper examines the effects of combining an international cap-and-trade
scheme with national carbon taxes. We consider a two-country stochastic partial equilibrium
model with log-normally distributed uncertainty. The situation is analogous to the situation
where European countries impose national carbon taxes in addition to the EU emissions
trading. The allowance price in the joint cap-and-trade scheme depends on the tax rate, the
relative size of countries and abatement options, the magnitude of uncertainty, and correlation
of abatement costs. In most cases, the additional tax will not lead to additional production of
the public good beyond the fixed targets. The additional tax results in higher costs of
abatement to the country introducing the additional tax, and higher costs overall.
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